Stack Attack on Gold

Pension Tension

This weekend's New York Times carried a story that was worth noting, not because regular readers aren't aware of it, but because it is a problem we are going to see replayed over and over in various cities, counties, and states over the next few years. Headlined, "The Little State With a Big Mess," the story is author Mary Walsh's chronicle of Rhode Island's financial plight in which she notes, "As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won't be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level." She is exactly right about that.

I don't want to reprise the entire article here, as readers can read it for themselves, but the fact of the matter is that many people have been distracted by the European financial melodrama. These longer-tailed problems like pensions and Social Security — loosely termed "entitlements" — are going to be a battleground for some time. They are another example of problems that don't matter until they do, and then they will be the only thing that matters. When that will be, I can't say. It could be part of the funding crisis, but it will most likely start to become a focus before then; as anyone who is paying attention even a little probably knows, certain cities and states are already having problems. At some point, I suspect the federal government will be forced to help many of these constituencies, since after bailing out Wall Street it will be difficult to say no to a state government in dire straits.

Gold Bubble Argument Still Doesn't Stack Up

That leads directly to the subject of money printing — the protection from which being gold — so I thought I would touch on comments made by Jim Stack in his most recent newsletter.

I have the utmost respect when it comes to Jim and his track record with the stock market. His ability to negotiate the ups and downs over the last decade has been extraordinary. That said, he wrote what I think is a very misguided article about gold. In it he basically tried to say that because the price of gold has risen more than the dollar has declined against other paper currencies, and more than the cumulative amount of inflation since 1982 (as though the CPI calculation were actually accurate), the "premium" people are paying for gold had to represent, in essence, fear — thus, given the size of that premium, he feels it is "a tad bubblish."

It strikes me as overly simplistic to think that the only thing that matters to gold is the perspective from the United States. Besides, the fact that the dollar has declined against other pieces of paper misses the point: all of them are worthless. The price of gold is going up because the world is voting against all of them. In addition, many countries, such as China, are experiencing a rate of inflation that is much higher than in the U.S. (and here it is far higher than the CPI suggests). It is the money printing and consequent erosion of the value of paper currencies that is behind the rise in the gold price.

Just because you can't measure exactly why it is where it is does not mean that it is a bubble. I have said the same thing on this topic so many times I am sick of saying it. But I would point out once again that most everyone who identified the prior two bubbles correctly owns gold. The only people who seem to think gold is a bubble are those who missed the previous two, with the exception perhaps of Jim Stack. (To be fair, he did not say it was an outright bubble, he just noted it was a potential example of bubble psychology.)

In any case, I thought I would address the subject before I get a number of emails about it.